This was my initial response as well, and I agree it could be abused by developers.

But I still think there's value in a free app that has paid upgrades, even if Apple has to classify them as "Mixed" instead of Free or Paid.

I am guessing that the in-app upsell feature will lead to a lot of apps dropping prices to the lowest level possible and using the incremental purchase options to increase revenue based on what the users what to get out of the app and what features they want to enable. It could basically lead to a-la carte feature & content selection for some apps.

and pay is better? I pay the $4.99 for your app and then you nickel and dime me to death?

In fact for paid apps its even worse because the developer has already gotten the $4.99 from me(which used to be their sole source of revenue up to this point), so any additional money I'd pay would just be bonus, so they have no incentives not to abuse the nickel and dime option

Why would you (or any customer) pay the initial $4.99 if you knew about and objected to the in-app purchases? Or if you didn't know, why would you pay the initial $4.99 unless you thought the product was worth it as-is?

Don't worry, Apple specifically said you can't do this. (Create a free app with paid content.)

A simple solution would be to place some sort of obvious badge on the App Store page if the app has in-game sales.